B2Gold Swoops In On Central Sun

VANCOUVER — With only hours to go before a 5 p. m. deadline on Jan. 30, Linear Gold (LRR-T, LGCFF-O) dropped its bid for Central Sun Mining (CSM-T, SMC-N) instead of topping B2Gold’s (BTO-T, BGLPF-O) counter-offer made four days earlier.

The move paves the way for B2Gold’s acquisition of Central Sun, fulfilling the former’s desire to become a gold producer.

Central Sun has been under the gun to find a cash source since last fall, when a US$22-million loan it had arranged fell through amidst the unfolding credit crisis.

“That sent us into a bit of a tailspin,” says Central Sun chief financial officer Denis Arsenault. “It was not a very pleasant situation.”

The loan was integral to Central Sun’s plan to upgrade its Orosi heap-leach mine with a conventional mill aimed at improving gold recovery. The mine is about 110 km east of Managua, in Nicaragua.

Arsenault says that as Central Sun’s management scrambled to arrange another loan, find a partner or a buyer, “they were not leaving any stone unturned.”

Potential terms offered by banks on new loans, however, were too steep, he says. The company’s “distressful situation” — the Oct. 16 implosion of Central Sun’s loan — did not help matters.

It was under these circumstances that Central Sun got its first of two pitches from aspirational gold producers.

The prize: In addition to the Orosi project, which Central Sun expects will produce 80,000 oz. gold per year, the company operates the 1,000-tonne-per-day Limon underground gold mine, also in Nicaragua, where it has pegged proven and probable reserves at 1.2 million tonnes grading 5.3 grams gold per tonne.

In the third quarter of 2008, output at Limon was about 10,000 oz. gold at a cash cost of about US$610 per oz.

On Dec. 24, Linear Gold made an all-share offer for Central Sun, proposing to exchange 0.4 of a Linear share for every Central Sun share. Based on Dec. 23 share prices, the offer valued Central Sun at $18.4 million.

As Arsenault puts it, “They had the money. We had the assets.” And in anticipation of closing the deal, Linear even announced a $15-million private placement.

But Linear was not the only junior with a healthy kitty and an eye to becoming a gold producer.

Just over a month after Linear made its intentions known, B2Gold announced a counteroffer. For every Central Sun share, B2Gold would provide 1.28 B2- Gold shares; it would also extend $10 million through a convertible debenture. Linear had offered a $2.5-million debenture.

Based on Jan. 26 share prices, B2Gold valued Central Sun at about $41 million versus Linear’s offer, which at that point had Central Sun at about $28 million.

Arsenault says Central Sun management put together an independent committee to assess the offers and also consulted Maquarie Capital Markets. When both said B2Gold’s bid was superior, Central Sun advised Linear it had the right to match it until 5 p. m. on Jan. 30.

With about four hours to go that day, Linear president and CEO Wade Dawe finally announced: “We are disappointed that Central Sun’s board of directors is recommending an alternative bid. Nevertheless, Linear has demonstrated its financial discipline over the years and will not be drawn into a bidding war.”

Instead, B2Gold and Linear agreed to sign a definitive agreement by Feb. 6. It will give Central Sun shareholders about 33% of the combined company’s 245 million outstanding shares.

If all goes according to plan, the deal not only means that Central Sun will have found much needed funds in B2Gold’s $55 million in cash and equivalents, but also that B2Gold will have taken its first step towards its stated goal of becoming an intermediate gold producer.

B2Gold’s management isn’t new to the strategy. Much of the B2- Gold team, including president and CEO Clive Johnson, built their former company, Bema Gold, up from a junior explorer into an intermediate gold producer that Kinross Gold (K-T, KGC-N) bought in 2007 for $3.5 billion.

Indeed, in a conference call to investors, Johnson confirmed B2Gold’s strategy. “We believe strongly that there’s an opportunity today to be a consolidator in the junior gold-producing sector,” he said. Noting that there are other opportunities like Central Sun out there, he said: “we can see rapidly growing B2Gold into the next intermediate gold producer.”

Becoming a “consolidator” marks a shift in thinking at B2Gold. When Johnson’s team initially formed the company in 2007 — raising $100 million off the bat–it focused on exploration. The reasoning: “Ounces of gold were too expensive to buy then,” he said.

That, as he noted, has changed. Despite good gold prices today, Johnson said the market downturn has nonetheless pushed down the value of some gold juniors and created opportunities for those with money to spend.

And when B2Gold went window-shopping Johnson said: “We identified Central Sun as a company we could bring good value to.”

Along with its cash, B2Gold brings to the combined company exploration properties in Colombia and Russia. In Colombia, it is mostly exploring for copper, molybdenum and gold on four properties: Gramalote (a 51%- owned joint venture with Anglo-Gold Ashanti [AU-N, AGD-L]), 80 km northeast of Medellin; Quebredona, 60 km southwest of Medellin; Miraflores, 55 km north of Pereira; and Mocoa, 67 km east of Pasto.

In Russia, it is exploring the Kupol East and West properties where it has the right to earn a 37.5% interest from Kinross.

Its most advanced-stage exploration property is Gramalote, where B2Gold recently announced an updated inferred resource estimate of 64 million tonnes grading 1.01 grams gold (2.1 million contained ounces gold).

But for the time being Johnson says B2Gold’s eyes will stay fixed on upgrading Orosi. President and CEO of Central Sun Peter Tagliamonte says Orosi can be up and running by the end of the fourth quarter of 2009 and if that schedule holds up it might mean B2- Gold will be producing more than 100,000 oz. gold in 2010.

Beyond Orosi, Johnson says B2Gold is working on a scoping study for Gramalote and says there could be an equity-raise worth about $20 million over the next three to six months.

Johnson says despite the premium B2Gold paid for Central Sun, investors appear to like the deal.

Since B2Gold announced its counter-offer, Central Sun’s share price has nearly doubled, gaining 41¢ to 80¢ at presstime. It has 62 million shares outstanding.

B2Gold gained about the same amount, trading at 74¢ at presstime, up from 44¢. It has 163 million shares outstanding.